Has the European Monetary Union stimulated labor market reforms leading Eurozone countries to converge?

Abstract

The movement from the Original to the Endogenous Optimum Currency Areas (OCA) theory implied that candidates for a monetary union were not required to comply with a number of economic conditions before the incorporation, but they would do it once they became members. Although there are multiple endogeneity channels, this paper investigates the labor market one. According to this strand of literature, the creation of a monetary union could stimulate countries to increase flexibility in their labor markets, leading them to converge. Using thirty-three years of data for twenty-two industrialized countries, we find a positive and growing relationship between labor market reforms and income correlations. However, this positive relationship vanishes in the case of peripheral Eurozone countries as compared to Germany. In addition, their unemployment rate correlations have become negative, that is EMU has not stimulated labor market reforms in these countries: the monetary union has not endogenously generated the mechanism to activate a better functioning of the labor market.